The Nonprofit Reporter, Inc.

The Wall Street Journal

December 10, 2007 on (click here for direct link to article).

How Charities Can Make Themselves More Open

We give billions of dollars to causes we believe in. So why do we know so little about how effectively the money is used?


December 10, 2007

It's been said we expect too much of charities. Perhaps the real problem is that we expect too little.

Last year, Americans gave $295 billion to charity, up roughly 65% from a decade ago. This surging bounty reflects our native belief in giving back to society — and a stubborn aversion to paying taxes. It feels good to help others and get a deduction at the same time.


But the warm feeling fades when we try to find out about charities' successes and failures. Donors can easily find raw financial information about charities — such as revenue and spending figures — as well as the name of whoever runs the operation. But those numbers won't tell you whether a charity's programs are working or failing. Consider a charity that raises money to help the blind function independently. Typically, the charity can't show that the people it helped achieved higher employment rates than they would have without its help.

Donors who want that kind of detailed analysis usually must do it themselves or rely on guesswork. And that makes it difficult — if not impossible — to figure out whether one group's approach to solving a problem is better than another's.

That's not good enough. It's time to make sure our gifts are being used as intelligently as possible. Instead of showering hard-earned dollars on charities and hoping for the best, we need to demand clear, detailed information on the results of their efforts. We ask the government and public corporations to be transparent and accountable. Charities should meet the same standard.

Specifically, charities and foundations should provide detailed information on their Web sites — everything from board members and their bios to an open discussion about problems they've encountered while trying to achieve their goals. Charities should also explain to donors how they measure their effectiveness — and stop flouting existing efforts at self-regulation. Finally, more charities should embrace rigorous forms of evaluation and report their findings to the public.

If charities and foundations were more open about the problems they face, the public would have a better understanding of the hard work they do. Armed with this knowledge, who knows? Americans might very well dig even deeper into their pockets to help charities in their struggle.

A recent study by the Center on Philanthropy at Indiana University found that high-net-worth Americans — who already contribute two-thirds of household charitable giving — would give more if nonprofits could rein in administrative costs and better demonstrate the impact of donations.

These aren't just abstract issues. Charities are looming large in America's future as a number of worrisome trends converge. A growing wealth gap and rising cost of living are putting huge pressures on families. Older workers are losing jobs to consolidation and technological change, and are unable to find new employment. People are living longer, yet many will be unable to support themselves in their twilight years.

Nonprofit officials must take the hard steps necessary to ensure that effective charities can get their story out and be rewarded with public support. Approaches that aren't effective should stop soaking up dollars better spent elsewhere.

Of course, any proposals for change face big hurdles. Perhaps the biggest: a culture of secrecy that keeps many charities from openly discussing their operations, especially efforts that have failed. The past few years have brought a string of reports of flagrant charity and foundation abuses -- officials who waste money on dubious fund-raising ploys or lavish executive perks. But most of the time, nonprofit officials keep quiet out of habit or fear. And they face no consequences for withholding more-meaningful information about the outcome of their work, so they see no reason to change.

Take the case of the Better Business Bureau's Wise Giving Alliance, which evaluates charities, following public inquiry, so donors can make more informed decisions about where to put their money. This year, about 30% of the charities that the alliance asked for information failed to provide it, up from 22% four years ago.

In many cases, "they choose not to participate, because they don't want the donating public to know" that they don't meet the group's standards, says Art Taylor, chief executive of Wise Giving Alliance. In other cases, he says, "charities are just getting going and they don't want to take the time to bother themselves with providing the information because they're finding out how difficult it is to manage the day-to-day operations of a charity."

Charities even ignore supposedly mandatory requests for disclosure. The Internal Revenue Service, for instance, explicitly asks charities to supply information about their performance each year. "All organizations must describe their exempt purpose achievements in a clear and concise manner," reads the IRS's charity document, Form 990. "State the number of clients served, publications issued, etc. Discuss achievements that are not measurable."

Yet charities routinely skip these requests -- without penalty. In theory, charities that don't fill out Form 990 fully and accurately are subject to fines. In practice, the IRS has focused its limited resources on more-flagrant abuses, such as excessive compensation and the use of charitable funds for terrorism purposes.

Many charities say they support the idea of better measurement but resist reporting results publicly, arguing that their work is tough to judge. Officials often say that the problems they are trying to solve can take many years to address and that progress is, therefore, difficult to measure. Moreover, charities worry that too much candor about their struggles could cause donors to take their money elsewhere.

That's true, but it doesn't absolve them of the need to explain their winning and losing efforts to the public, just as publicly traded companies must release detailed information on their profits and losses.

"I think we get irrational pushback from nonprofits who say, 'You can't measure mission-centered work,' " says Brian Gallagher, chief executive of United Way of America and chairman of Independent Sector, a coalition of charity and philanthropy leaders. "You most certainly can. The question is, 'Are you committed to do it?' And then, 'Are you committed to report on it?' "

Without such information, says philanthropist Gerald Greenwald, the retired chairman of United Airlines, "those that are really succeeding don't get the applause and money they should, and those that aren't doing very well seem to just live on forever."

Just as important, other well-intentioned people trying to solve the same complex problems are likely to repeat the same mistakes others have made, or overlook promising opportunities, because of the information vacuum.

"Talking about what hasn't worked will help the nonprofit sector's credibility with the donating public," says Iowa Senator Charles Grassley, who has been pressing nonprofits to reform. "Most important, it will help make sure charities are more effective in helping the needy."

Moreover, if charities don't set tougher standards, Congress may do it for them. Speaking before a gathering of charity officials in October, Steven T. Miller, commissioner of the IRS's Tax Exempt and Government Entities division, issued this stark warning: "Failure to self-regulate now may result in a lost opportunity for you to do so later."

So what could charities — or the government — do to make their work more successful? Here are three suggestions that could make a difference:


Too many charities fail to make information about their accomplishments, struggles, boards and executive staff easily available online. As a first step, charities should offer detailed financial and management information on their Web sites. Easy access to such information is crucial for helping donors form reasoned opinions about a charity's mission, effectiveness and leadership.

A small but growing number of nonprofits are starting to measure and report publicly on successes and failures. In October, the American Cancer Society released a 118-page "progress report" aimed at tracking progress toward its goals of reducing cancer rates by 2015. While the report highlighted certain successes, it also spotlighted failures — including the society's likely inability to reduce the incidence of lung cancer by 45% by 2015. This kind of disclosure "is where I believe the sector is going," says Catherine Mickle, the cancer society's chief financial officer. As donors begin to think more like investors, "we are trying to hold ourselves to that standard, before it gets applied to us."

Some watchdog groups operate online databases about charities. They're certainly helpful as a central resource, but most of them are limited by the lack of available information. Take, an electronic database that posts the IRS forms that charities file every year. GuideStar supplements this data by organizing and analyzing the forms, and collecting more information from charities.

But there are limits to what GuideStar can do because charities sometimes don't disclose necessary information and the Form 990 itself has shortcomings. The form provides information about how much money the charities took in and where they spent it, but almost no information about the actual effects of that spending. Beyond that, only organizations with annual revenue of $25,000 or more are required to file the form. That amounts to about 30% of active charities — which leaves a big gap in available data.

By the time GuideStar can put the information online, it's sometimes as much as two years old, and nonprofits don't always go out of their way to update it, says Phil Buchanan, president of the Center for Effective Philanthropy, a nonprofit that helps foundations evaluate their programs.


In the wake of charity abuses, much time and attention has been focused on measuring charity efficiency. But charities complain that concentrating on administrative costs discourages investments in sound management. Others say it's easy for charities to fudge the numbers, underreporting true administrative costs to make themselves look more efficient.

These debates obscure the bigger problem: There is no system for measuring and reporting charity results. Simply put, "most charities that seek to be charitable could easily pass almost any test for simple charitable status and still not be very effective in their charitable efforts," said Eugene Steuerle, a senior fellow at the Urban Institute, in a series of papers he released this summer.

A number of philanthropy leaders are starting to address the need for greater accountability. In a series of independent proposals, they're trying to set up voluntary standards for charities to follow in assessing their operations and results. The proposals are still in the planning stage, but they offer a good snapshot of the concerns more nonprofits should address.


The problem with voluntary standards, of course, is that they can be ignored without risk — as many charities now do. Regulators have stepped up their efforts to enforce broader compliance and to reduce the inaccuracies and incomplete statements that riddle too many charity tax documents. The IRS is preparing to shift to electronic filing for Form 990, partly in an effort to make it more difficult to provide incomplete answers; if a charity official skips a question in the electronic form, the computer program will spit it back.

But, given its limited resources and legal mandate, the IRS won't be able to track all charity activities. Indeed, agency officials have indicated that the IRS doesn't intend to press charities to report how effective they are.

Marcus Owens, the former head of the IRS's tax-exempt division and now a lawyer in private practice with Caplin & Drysdale in Washington, D.C., suggests that charities collaborate with the government to develop an independent oversight board to regulate charities. The board would include representatives from the charity world, plus government and independent directors. Membership would be mandatory, and groups that didn't meet the standards could be subject to penalties or possible action by the IRS.

So far, Mr. Owens's idea hasn't gotten much traction. Congress and charity leaders are grappling with other big issues, such as whether nonprofits should be required to spend more of their massive endowments.

A good starting point is to insist that charities regulate their conduct on their own. Every group should pick standards and adhere to them -- and let the public know exactly how they're doing.

If charities and foundations oppose any sort of self-regulation, says Diana Aviv, chief executive of Independent Sector, that "raises the question of whether you think you should be free to behave in any which way. And if you feel that way, then you shouldn't take a tax deduction."

--Ms. Beatty is a special writer in The Wall Street Journal's New York bureau.